Category: Finances

In order for a family to keep positive cash flow they have understand where they are spending their money and that is where a budget comes into play. The story that follows details the road my wife and I took as we looked to establish our first budget.

As we entered into 2017 my wife and I were discussing our goals for the year, we realized that to be successful we would need some sort of a budget. We knew that establishing a budget would help us visualize how much and where we were spending each month. In addition, we also wanted to see some historical information so that we could accurately estimate for items such as gas, groceries and such.

In an effort to make our budget creation as painless as possible we turned to two tools; Personal Capitaland Excel.

Personal Capital

To get started we generated a report in Personal Capital detailing our spending over the last 6 months (July – December). As we went through this drill we didn’t expect any real surprises as we thought we had a good handle on our spending. Well, we were wrong. Over the prior 6 months we had spent $4,033 on groceries or $672 each month.

Armed with this new found information we used the $672 as our baseline in our budget and agreed that we can easily trim that by $100 to $150 a month with proper meal planning.

To illustrate one more example showing we didn’t understand how much we were spending, as we dove into our finances we realized that we were also spending $528 a year on haircuts. This was for 3 people (myself and 2 sons) and each of us get a haircut once a month. Our mouths hit the floor with this expense. This was one of those expenses we always over looked because it is essential to stay groomed. I would like to add that we decided to cut this expense all together and have my wife cut our hair since we don’t do anything difficult. Boom! An extra $528 saved every year!

As you can see, Personal Capital opened up our eyes to where we were spending our money and has helped us with our budget.

Excel Spreadsheets

In addition to Personal Capital, we also used an old fashioned budget template from Excel to put our monthly expenses in. This helps us project our budget for the entire year. Personal Capital is great but it doesn’t allow us to project for items that haven’t happened yet. For example, car maintenance, medical emergency, vacations and such.

By keeping the spreadsheet current each month with actual expenses from Personal Capital and our forecasting we can easily see if we are on track with saving for our investments, vacations and such. This also helps us easily plan for large purchase items as well.

As you can see, if we didn’t go through the drill of creating a budget we would not have had our eyes opened as to where we were over spending. This has easily helped us increase what we are saving.

So let me ask you again, are budgets important?

Note: If you would like to use a template from Excel you can browse them here.

All to often I hear people talking about how they live paycheck to paycheck. This appears to be the norm for most people and yet it doesn’t have to be. Let me explain.

What if we ran our family finances like a business? Businesses goals are to be in the black, otherwise known as making a profit. How do businesses accomplish this? Simple. They ensure their costs don’t exceed their income. In addition, a good business will also ensure they have money saved for the unexpected emergency, slow business cycle, reinvesting into the business and many other reasons.

On the flip side, if we look at how a family operates their finances, we see that many operate in the red, otherwise known as taking a loss. Many times families are stricken with debt from credit cards, car payments, or too much house (mortgage). This means that our costs are exceeding our income.

Lets examine this a little more. A businesses monthly expenses could look something like this:

Payroll

Phone Service

Marketing

Insurance

Rent

Inventory

A family on the other hand could look like the following:

Mortgage

Cable TV

Cell phones

Subscriptions such as Hulu, Netflix, Amazon Prime, Apple Music and the list goes on and on

Car payments

As you can see above, the business only has items that are required for it to operate. Yes, you will have some expenses that could be questionable but at the end of the day their goal is to remain profitable.

The family on the other hand doesn’t look at remaining profitable, rather they look at, can they make the payment each month. This is a stark contrast to how a business runs their checkbook. The business is able to build wealth while the family remains at the break even point or begins piling on debt.

If a business operates like the family, they go out of business. It is that simple. If a family operates in the red, you risk ruining your credit, having your wages garnished or loss of possessions such as cars and house.

So often we convince ourselves that we need something or we find a reason to justify the purchase. Before making a purchase, if we could pause for a minute to ask ourselves a few questions:

What is the value add for our family?

Will this purchase make us more profitable?

What happens if we don’t purchase it?

What is the cost of ownership?

Is there a return on investment?

You can be assured a business would ask itself similar questions before a purchase. As a family we should take that same approach. If we would review our finances, create a budget, set goals and remind ourselves that we have to remain profitable, we might think twice before we go buy that new car or upgrade our cell phone.

The most important business we will ever run is our family. By running our family like a business we have the opportunity to be profitable, teach our children how to be responsible with money and enjoy life without the worry of how to pay the bills. For me personally, teaching my children is the ultimate satisfaction!

Next time we will be discussing budgets. Stay tuned!

**Note**

Businesses can and do run in the red. The point of the post isn’t to say that they don’t, rather to point out that their goal is to remain in the black and that as a family we should also have the same goal.

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About Mr. MFM (my first million)

I am a 40 something year old IT Consultant working to become financially independent by 50. I want to enjoy the finer things in life (family and friends). I am also blessed to be married and a father of two beautiful boys!

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The owner of this website is not a financial adviser, tax professional or investment professional. All information provided on this site is for informational purposes only. If you need financial assistance please seek out a professional planner.